Category Archives: Credit 101

Post navigation

Financial matters can be an uncomfortable or touchy subject to discuss with friends and loved ones. However, if you’re about to walk down the aisle with someone, it’s important to have an honest discussion about credit. After all, “till death do us part,” means you’re essentially inheriting each other’s credit for that long, too.

Since you have chosen to marry this person, however, chances are that you have a good idea of their preferred communication style. Use this to your advantage when you decide to bring up this all-important discussion. If you’re still uneasy about approaching the subject, here are some tips and guidelines to help.

Just ask

While this scenario isn’t ideal for everyone, it works for some couples. If you’re curious about your future spouse’s credit history and outlook on credit, just ask them. You may be surprised to realize that they’re relieved to have the conversation as well. At the end of the day, you need to know where each of you stand.

Take a marriage course

Many people who practice specific religions and wish to get married in their preferred place of worship may be required to undergo a “marriage course.” If this is the case for you and your soon-to-be spouse, ask your church leader if he or she plans to work finances into the discussion at some point. If not, request to do so. The purpose of a marriage course is to set boundaries and identify potential obstacles ahead of time, eliminating the possibility of more serious issues down the road.

Enlist a neutral third party

If you’re uncomfortable with this topic of discussion, try enlisting the services of a mediator. They often offer more services beyond civil disputes and divorce. They’re trained in conflict resolution, so if this has been a topic you’ve broached unsuccessfully at some point, they can help you resolve it in a calm manner.

Schedule a “credit discussion”

If you haven’t yet talked to your future spouse about this all-important subject, he or she will likely suspect the discussion is coming. Try asking them over dinner one night if the two of you can schedule a meeting to discuss your individual finances, and decide if joining accounts is right for you both.

Try premarital counseling

Many couples like the idea of being well-prepared for the challenges of marriage beyond just the financial aspect. Many counselors specialize in couples therapy and can serve a similar role as that of a church leader mentioned above in helping you to navigate a constructive discussion. Visiting a couples therapist doesn’t mean your relationship is in trouble. We often see doctors for preventative care; why should your relationship be any different? Plus, as a neutral third party who will be dedicated to the health of your relationship, they can help you outline a plan that works for everyone.

Determine your financial compatibility quiz

If you want to approach the subject of credit, but are unsure of how to do so, try asking your partner to take a financial compatibility quiz. There are many quizzes online that can help you judge your compatibility when it comes to matters of credit and how you manage your finances. This is a great way help you get on the same page with your soon-to-be spouse.

Email them an informative article to open the discussion

There are many credit repair resources online that offer tips on giving your credit a boost before a major life event. Consider using one of these to your advantage by sending an article to your future husband or wife as a catalyst for starting the conversation.

Bring it up casually

The ads and events we’re subjected to every day actually offer a perfect opportunity to introduce the topic of your current financial standing and hopes for your future together. There are certainly plenty of credit-related issues in the news and in mainstream media these days. The next time you hear a story about a credit breach or see a commercial related to obtaining a home or car loan, use this as an opportunity to start a conversation. Or next time you’re driving and see a billboard for a credit repair company, point it out and get the ball rolling.

Talk about your personal financial goals

Talk to your betrothed openly about your lifetime goals and how your finances and credit will impact them. Maybe you’d like to buy a home, make different types of investments, or set yourself up to travel the world in your retirement years. Sharing these goals and dreams may prompt your partner to open up about their own financial vision for the future.

End on a positive note

Whatever comes of your discussion, make sure to end it on a good note. You’re getting married! So pop a bottle of champagne and share a toast. There’s always a reason to celebrate such a happy event and look forward to the endless possibilities the future may hold.

Many people ask, What’s the best way to get out of debt? Then they may often think, But I have good credit and I really don’t want to hurt it. There are many ways to lighten your debt load, and not all of them will have a major negative effect on your credit. But it’s also important to consider your situation and needs when weighing your options.

To help you decide which debt relief plan is best for you, we’ve provided a brief overview of each option and how they may affect your credit in the short term and long term.

A Few Things to Remember

Before we dive into the different debt relief options, understand that the debt you carry makes up just under one-third of your credit score. So when you pay off debt, especially credit cards that are close to their credit limits, you should see improvement in that part of your score.

However, understand that our analysis of credit relief plans is based on generalities. It doesn’t necessarily represent exactly what will happen in your case. How far your score drops—and how quickly it bounces back—depends on a lot of different factors. If your payment history always shows on-time payments, for example, and you suddenly file for bankruptcy, your score will probably drop more than someone who was already severely delinquent.

But it’s impossible to predict how a particular approach will impact your individual credit if you’re not familiar with your credit history—so get a free credit report from Credit.com to review that history.

With this information in mind, here are the main approaches to debt relief you may consider, along with a review of the impact they could have on your credit reports and scores.

Debt Snowballs and Avalanches

If you prefer to pay off your debt on your own, you might consider a snowball or avalanche payment method. The debt snowball is when you pay off your debts one at a time, starting with the lowest balance. The debt avalanche works similarly, except you start with your highest balance and work your way down.

It doesn’t make much of a difference whether you choose the avalanche method or the snowball method, but many find the snowball method is easier to stick to. Neither approach will hurt your credit, as long as you make the minimum payments on all of your cards on time.

Immediate Credit Impact: None

Long-Term Credit Impact: Reliably Positive

Debt Consolidation

Combining multiple card debts into a fixed-rate consolidation loan can be helpful, but it isn’t a strategy for getting out of debt in and of itself. After all, you still have to pay back the loan. A consolidation loan is more like a tool to get out of debt faster.

Because consolidation loans often offer lower interest rates than the credit cards themselves, you can pay off your debt faster. And if you have a lower monthly payment than before, you can better avoid late payments. This will help your credit score recover more quickly if you’ve fallen behind in the past.

But consolidating credit cards with a loan may have a positive or negative effect on your scores. It’s one of those “it depends” situations.

On the plus side, if you pay off a card balance that’s close to the credit limit, you may improve your “utilization ratio”—the ratio that compares your credit limits with the balances you currently have—provided you leave the card open after paying it off. But simply moving balances from one card to another is unlikely to do a whole lot for your scores.

On the other hand, you’ll have a new loan on your credit reports, and most credit scoring models will count that as a risk factor, which could mean a dip or drop in your scores.

The exception? If you take out a loan from your retirement account to consolidate credit card debt, you’re more likely to see your credit improve. Retirement account loans aren’t reported to credit reporting agencies, so your credit reports will show less debt with no new loan. However, retirement loans carry their own risks, so proceed with caution.

Immediate Credit Impact: None

Long-Term Credit Impact: Minimal

Credit Counseling

A credit counselor is a professional who can advise you on how to handle and successfully pay off your debt. A simple call to a credit counseling agency for a consultation won’t impact your credit in the slightest. But if the credit counselor or agency enrolls you in any kind of consolidation, repayment, or management plan, that could affect your credit.

Make sure you fully understand the potential impact of any debt relief program before you sign up. Don’t be afraid to ask the credit counselor how a new plan could alter your credit.

Immediate Credit Impact: None

Long-Term Credit Impact: None

Debt Management Plan (DMP)

With a Debt Management Plan (DMP), you make one monthly payment to a counseling agency, which then disburses payments to your creditors. This kind of plan can affect your credit in several ways.

Some creditors may report that a credit counseling agency is repaying the account. Don’t worry if they do. FICO, the data analytics corporation that calculates consumer credit risk, ignore such reports. An individual lender may care, but FICO doesn’t. Of course, any late payments or high balances on accounts will continue to impact your credit score.

With the help of the counseling agency, you can stay current on your payments, and that can improve your credit score. “Most major creditors will re-age your accounts after you’ve made three on-time payments in the required amount,” says Thomas J. Fox, community outreach director for Cambridge Credit Counseling.

Re-aging an account means bringing it back to “current” status, so your credit report will no longer list you as behind. Since recent late payments can really hurt your scores, getting up to date on your payments now is a smart move, especially as the sting of past late payments fades over time.

However, you’ll have to close your credit cards when you agree to a DMP, and that will likely lower your scores. How much it will hurt depends on everything else in your credit reports, including whether you have other credit accounts, such as car loans or mortgages, that you pay on time.

The impact may take time, says Barry Paperno, community director for Credit.com. He states it’s because “balances and limits won’t necessarily change right away, and utilization will be the same as before closing accounts.

He goes on to explain, “Closing an account in and of itself isn’t considered negative by the score. Over time, however, having closed the cards can hurt the score, as closed cards with zero balances are excluded from utilization and ultimately fall off the credit report much sooner than open cards that have been paid off.”

“Plan on getting a secured card when you complete the DMP so that as long as you keep a low utilization percentage on that one card, you can achieve a good score—with any [late payments] fading well into the past,” Paperno continues. “Also, your old closed cards will continue to contribute positively to your overall length of credit history for as long as they remain on your credit report (typically 7 or 10 years).”

Immediate Credit Impact: Moderate impact (positive or negative)

Long-Term Credit Impact: Minimal

Debt Negotiation or Settlement

Some creditors may allow you to settle your debt, which permits you to pay less than the full balance you owe. But creditors typically won’t settle debts with consumers who make their payments on time, so it’s a better option for those that already have several late payments on their credit report.

On top of that, “most creditors will report the settlement as something like ‘paid less than full balance’ if you settle the debt before it has been charged off,” warns Michael Bovee, community manager for DebtConsolidationCare.com. Creditors generally charge off debts when borrowers fall 180 days behind. And charged off debts often get turned over to collection agencies.

Bovee further explains, “When you settle a charged-off debt, getting it reported [with a] zero balance due will not in and of itself help your credit because the damage has already been done.” But it could help you ward off further damage from, say, a potential lawsuit.

In other words, settling an account before it gets charged off can prevent it from going to collections and adding another negative item to your credit reports—or causing other harm.

Brad Stroh, co-CEO of Freedom Debt Relief, adds, “Debt settlement hurts people’s credit scores but helps their credit profiles. [It’s] worth considering for anyone struggling to pay a lot of credit card debt, despite its negative effects on credit scores. It is far easier to rebuild one’s credit than to get out of debt, and people carrying a lot of debt likely have credit problems already.”

Immediate Credit Impact: Severe damage

Long-Term Credit Impact: Slow recovery

Bankruptcy

It’s well known that filing for bankruptcy will hurt your credit score—bankruptcies can stay on your report for up to 10 years from the filing date. However, with updates in the credit scoring algorithms, a bankruptcy isn’t the credit death knell it used to be.

Credit scoring algorithms typically segment consumers into subgroups called “scorecards.” If you experience a significant negative credit event, such as a bankruptcy, you’ll likely be compared with other consumers who’ve experienced something similar for credit scoring purposes.

As far as your credit is concerned, you can recover from Chapter 13 bankruptcies more easily than other types of bankruptcies. In Chapter 13 bankruptcies, you typically pay back some or all of your debts over a period of three to five years, and they come off your credit reports seven years after the filing date.

So if it takes you four years to complete your Chapter 13 plan, you have to wait only three more years before the bankruptcy disappears from your reports.

However, you’ll probably end up paying more in a Chapter 13 bankruptcy than a Chapter 7 bankruptcy, where you wipe out all or most of your debts by selling some of your assets. Make sure you discuss both options with a qualified consumer bankruptcy attorney.

Immediate Credit Impact: Severe damage

Long-Term Credit Impact: Slow recovery

Getting Back on Track

Whichever method you choose, keep in mind that the ultimate goal is to pay off your debt so you can save and invest for future goals. A hit to your credit may be worth it if it means you can finally get your balances to zero. Monitor your credit, consider getting a secured card if necessary, and keep your financial situation in perspective.

“People just worry about their credit too much,” says Fox. “If your couch is on fire, would you not throw water on the fire because you don’t want to damage the upholstery?”

As you work to pay off your debts, it’s a good idea to keep an eye on your credit score to see how you’re improving. Get your credit score for free from Credit.com.

You open your statement and discover you’re late on your credit card payment. Or you get a call from a collection agency about a medical bill you forgot to pay. Or you check your credit reports and discover a late payment is marring your otherwise perfect payment history.

What happens if you miss a credit card payment? How do late payments affect your credit scores? Of course, as with so many things related to credit scores, the answer is, “It depends.”

Hope for the Best

Late payments and good credit scores go together like toothpaste and orange juice—they don’t mix. But just how bad is it to miss a single payment?

First, it depends on how many days late your payment is. If you missed your credit card payment by one day, you probably don’t need to sweat it.

If you’re lucky, the lender won’t report the lapse. “Most lenders do not report missed payments until the account is 30-plus days past due,” says Anthony Sprauve, PR director for MyFico.com.

“Suppose a given credit card payment is due on May 15 [and you pay on] May 25. Technically, the payment is late, and fees and interest charges may apply. But in most cases, this late payment would not be reported by the creditor to the credit reporting agencies [CRAs].”

Or perhaps your lender may overlook the transgression. Steve Ely, president of eCredable.com, adds, “The larger creditors [like credit card companies] usually have sophisticated analytic models working behind the scenes that take into account your history of payments. If you’ve been paying on time for a long time, they’re likely to forgive your one late payment and let it slide.”

But Brace for the Worst

What if you don’t luck out and the creditor reports the late payment? Here are three questions that will help you understand the possible impact, according to Barry Paperno, community director for Credit.com:

How long ago did the most recent late payment occur?

How severe were the late payments (30 days, 60 days, charged off, etc.)?

How many accounts on the credit report have had late payments?

“Of these three questions, the one typically having the most impact on your credit score is the first: recency,” says Paperno. “To illustrate, if a single late credit payment occurred a few years ago and all payments on all accounts have been made on time since, that single late payment will have little negative impact on your score.”

How Bad Can It Get?

To put the potential consequences in perspective, Paperno points to a study about credit scoring effects conducted by FICO that points to a scary possibility. “[A] recent late payment can cause as much as a 90- to 110-point drop on a FICO score of 780 or higher.”

Although score drops from late payments tend to rise again over time, these credit dings can remain on your credit report for seven years, according to Paperno. You can expect the effects to last for much of that time.

Sprauve also explains that the impact of a missed credit card payment or late bill on your FICO credit score varies significantly depending upon the individual consumer’s circumstances. He details some of the factors that can help determine how much a late payment will hurt your scores:

Any history of account delinquencies or collection references (on any account)

Any adverse legal items on your credit report

The outstanding balance on the delinquent account

The number of other accounts on the file that you’ve currently paid as agreed

The length of your credit history

The Bigger They Are, the Harder They Fall

The irony is, the better your credit, the more you may feel the sting. One slipup and your credit score may take a dive—even if you have otherwise stellar credit.

“The old [adage] of ‘the bigger they are, the harder they fall’ applies to credit scores too,” warns Ely. “If you have a really high FICO Score, you’ll take a bigger hit for a late payment than someone with a lower FICO Score.”

The best defense is to be meticulous about paying your bills by the due date. But if you do mess up, see if you can’t convince the lender or collector to remove the ding from your reports. While they may balk at first, you may be able to persuade them to change their mind if you have a good explanation—and they believe you when say it won’t happen again.

[Offer: Bad Credit? The credit professionals at Lexington Law use their legal expertise to help you aim for a better credit profile. Start by getting your credit reports, then connect with Lexington Law’s attorneys and paralegals who will review your credit reports and help you dispute any errors with the credit bureaus. Get started today or call (844) 346-3296 for a free credit consultation.]

The most well-known consequence of having bad credit is trouble getting loans or credit cards, but a low credit score can also make it difficult to find a place to live. Landlords, especially large property-management companies, will likely check your credit report before approving your lease, and there are plenty of negative items that landlords see as deal breakers with potential tenants.

But don’t fret—you may still have options.

Is Bad Credit an Automatic Rejection?

By most landlords’ standards, the minimum credit score to rent an apartment is 620. But many landlords look past the credit score and search for specific activity on a potential tenant’s credit report.

Ben Papale, a real estate broker in Chicago, Illinois, says judgments, tax liens, and collections accounts on utilities are almost always nonstarters, but medical collections and late credit card payments aren’t as problematic in the eyes of a landlord.

Barry Maher, a property manager in Corona, California, says the 2007 recession changed his mind on bad credit. Before, he never looked at applicants with bad credit because plenty of other applicants had good credit. Then suddenly almost all the applicants had a credit problem.

“I started looking at it more closely,” Maher says. “Particularly after the recession hit, I had people who had declared bankruptcy, people who had lost their houses. But I was still able to find some incredibly good people to rent to.”

It can be difficult to get into an apartment with bad credit, but there are a handful of things you can do to improve your approval chances. Use the seven tips below to help you get into that apartment or house you’ve been eyeing.

1. Find an Apartment with No Credit Check or an Independent Owner

Large management companies are less likely to consider applicants with bad credit, so you’ll want to look for a landlord who has a small operation—who maybe owns just a few units or properties.

“They’re a lot more open to considering special considerations,” Papale says. Large management companies are unlikely to make exceptions because that opens them up to the possibility of getting sued if someone in a similar situation applies for an apartment and is denied, Papale says.

If you’re dealing with an individual, rather than a company, you may have an opportunity to tell your story and explain why you’d be a good tenant.

2. Explain in Person

Maher puts a lot of stock in personal interactions. He says he always makes reference calls himself—the one time he didn’t led to a terrible tenant, and he won’t make that mistake again. Now he knows there’s a lot of value in meeting potential renters before deciding.

“If they’re forthcoming and they meet with the person making the final decision to explain their case, they’re way ahead of the game,” Maher says.

Papale recommends renters with bad credit write personal statements to send in with their applications—to put the credit problems in context and make an argument for themselves.

3. Be Open about Your Income and Savings

When explaining your personal situation, proof of a stable income can go a long way. Come prepared with pay stubs, and show you make enough to comfortably pay rent—rent should be less than 30% of your monthly income. Knowing you’re not strapped for cash will be a comfort to your potential landlord.

If you don’t have a steady income but you do have a sizeable bank account, bring bank statements that show you have enough savings to pay at least six months’ worth of rent. A financial cushion is better than nothing, and it may bring an independent owner over to your side.

4. Make Advanced or Larger Payments

Money talks. Just like how showing your income can help your chances of getting into an apartment, making a large advanced payment can be a helpful gesture of good will. Paying a larger deposit than requested or even three months of rent in advance will elevate your renting potential in a landlord’s eyes.

5. Find a Roommate

If you don’t have your heart set on having an apartment to yourself, a roommate can be a good solution while you improve your credit. Find someone who is already secure in their lease you can move in with without needing a credit check. Or find a landlord who will let you move into a new place with only your roommate’s name on the lease.

You can save money by splitting rent with a roommate, and your landlord will feel more comfortable having at least one person with good credit living in the apartment. Just don’t hang your roommate out to dry when rent is due.

6. Consider a Guarantor or Cosigner as a Last Resort

Having a friend or family member cosign on your rental application will make getting into an apartment a lot easier, but it can strain your relationship. If you choose this route, you’ll have to find a cosigner who has a secure income and good credit that they’re willing to put on the line for you.

You also need to be certain you will be able to pay rent every month. Missing a payment means your cosigner will be forced to pay it on your behalf, which can lead to a lack of trust. Nobody wants that, so again: make sure you can pay the rent!

7. Repair Credit for Future Apartment Hunting

Once you’ve gone through all the work to get into an apartment with less-than-ideal credit, take steps to avoid this situation in the future. You can repair your credit in about one to two years if you put your mind to it.

It’s important to check your credit scores before applying for a rental. By doing so, you can not only proactively address any credit issues you have but also make sure you’re accurately representing yourself. Credit scores fluctuate constantly, so keep an eye on your score. You wouldn’t want to fill out an application thinking everything’s fine only to have a landlord think you lied because he found issues with your credit report. Get your credit score for free on Credit.com, with updates every 30 days.

From student loans to a house mortgage, debt accumulation is stressful and overwhelming. As you make moves to get out of debt, you might want to consider consolidating credit cards or other loans to save you time and money. But that begs the question—does debt consolidation help or hurt your credit?

The answer depends on how you consolidat­e and what you do with your debt afterward.

1. Debt Consolidation Loans

Getting a new loan to pay off other debts is the most popular way to consolidate. It’s certainly what most people think of when they consider consolidation. But finding a loan that has decent terms and is designed specifically for the purpose of consolidation can be challenging—especially if your credit scores are a bit lower due to the balances you’re carrying.

Tip: Triple check lenders’ certifications to make sure you’re dealing with a legitimate site if you’re shopping for a loan online. Scams abound.

Effect on Your Credit: Consolidating credit cards with high balances using an installment loan (i.e. a loan with fixed monthly payments) may actually benefit your credit rating, especially if you use the loan to pay off credit cards that are near their limits. At the same time, any new loan can cause a short-term dip in your credit scores—so don’t be too surprised if you see your credit score change slightly when taking out a new loan.

2. Debt Management Plans

Debt management plans are often confused with debt consolidation—however, they’re very different programs. Debt management plans (DMPs) are offered through credit counseling agencies and, much to many people’s surprise, they don’t actually consolidate your debt.

Instead, you make a “consolidated” payment to the counseling agency, which then pays each of your creditors—usually at a reduced interest rate. Even though you’re making only one or two monthly payments, the counseling agency doesn’t actually pay off your creditors for you—it simply acts as a middle man to help you repay your debts and ensure that the creditors get the money they’re owed. These programs are available regardless of credit scores, so if you are having trouble consolidating, a DMP might be worth considering.

Tip: If you choose to move forward with a DMP, you should close or suspend your credit card accounts. Unfortunately, you’re not permitted to use credit cards while enrolled in a DMP.

Effect on Your Credit: If you have a good credit score and adhered to a creditor’s repayment terms in the past, a DMP could have a negative impact on your credit as it indicates that you are experiencing or have experienced difficulty with payments. Also, since a DMP directly impacts payment terms, credit reporting agencies might ping your DMP commitment because it designates a change in payment policies.

3. The Credit Card Shuffle

Transferring a high-rate credit card balance to a card with a lower rate is another way to consolidate. Carrie Rocha, author of Pocket Your Dollars: 5 Attitude Changes That Will Help You Pay Down Debt, and her husband paid off some $60,000 in debt, and taking advantage of low-rate balance transfers was one of the strategies they used to dig out. However, if you decide to go this route, you must be very disciplined in your approach. Otherwise, you may fall into traps such as getting stuck with a balance at a high interest rate after the introductory period ends.

Effect on Your Credit: It depends on how you use a transfer. You’ll often see a temporary dip in your credit score when opening any new card. If you use a substantial portion of the available credit (on the card) to consolidate balances from other cards with lower balance-to-available-credit ratios, your credit scores may drop from that as well. Finally, you may also lose points if you open a new card and use a majority of the credit line to consolidate.

However, if a 0% card allows you to save money and pay off your debt faster, you can come out ahead in the long run, both financially and credit score–wise.

The End Goal:Less Debt Equals Stronger Credit

Paying down debt can have a tremendous impact on your credit scores. According to FICO, the company behind most of the credit scores used by lenders, consumers with high credit scores (e.g. 785 and above), tend to keep their balances low. Specifically, two-thirds of consumers with good credit carry less than $8,500 in non-mortgage debt, and they use an average of 7% of their available credit on their credit cards.

That means that paying off debt—whether you use a consolidation loan or just put every penny you can toward your debt—will often improve your credit ratings in the long run. The biggest risk, though, is that it’s easy to run up new balances on the cards you paid off in the consolidation—and that’s definitely not a good move for your credit or your bottom line. As you make progress on paying off your loans, periodically check your free credit report to see where you stand.

Remember, moving debt is a means to your end. The goal is to pay off those balances and free up cash flow as well as to help build strong credit. So whether it’s a consolidation loan, credit card shuffle, or DMP, know your options so you get there just a little faster.

Not many know what a 1099-C is or why they receive it. But these forms can be a little scary because they’re tax documents—and no one wants to mess up their taxes. When you get one, it’s because you had a portion or all of a debt canceled.

It’s important to understand what a 1099-C is and what to do about it to ensure you are filing your taxes correctly. Here’s what you need to know.

What’s a 1099-C?

A 1099-C falls under the 1099 tax form series of information returns for the Internal Revenue Service (IRS). These forms let the IRS know you’ve received income outside of your W-2 income. Any company that pays an individual $600 or more in a year is required to send the recipient a 1099. You often receive a 1099-C when $600 or more of your debt is forgiven or discharged.

When you use credit or take out a loan, that borrowed money is still currency you can use—even if you don’t pay it back. So when debt is canceled, that money is considered ordinary income and is therefore taxable (if over $600), which means you have to report it on your tax return. Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged.

You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest.

You owned a home that went into foreclosure and there was a forgiven deficiency (a difference between the home’s value and what you owe on it).

You sold a home in a short sale where the lender agreed to accept less than the full amount you owe.

You didn’t pay anything on a debt for at least three years and there has been no collection activity in the past year.

Are My Debts Erased with a 1099-C?

If you know you received a 1099-C because of a settlement agreement, where you paid off debt for less than the full amount due, then you don’t owe anything. If the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may determine what debt you are and are not responsible for.

Anytime you receive a 1099-C, check the form for errors. If you find any, first work with your creditor to get the information corrected. If that doesn’t resolve the issue, then you can include an explanation with your tax return. To find out if a 1099-C has been filed, you can request a wage and income transcript from the IRS for the tax year or years in question. The transcript should list any 1099-Cs that were filed under your Social Security number.

Do I Have to Pay Taxes on the 1099-C Amount?

The IRS will automatically assume that the amount listed on the 1099-C is accurate and will expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, you could receive a larger tax bill or a smaller refund. However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income.

One of the most commonly used exclusions is the insolvency exclusion. It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.

If the amount by which you are insolvent is less than the amount on the 1099-C, then you may be able to avoid including part of that amount in your income. However, the insolvency exclusion may not be the perfect fit for everyone—there may be another exclusion that fits your situation better.

What if I Don’t Receive a 1099-C for Canceled Debt?

Even if you don’t receive a 1099-C, you are still responsible for reporting canceled debt as taxable income. Make sure you do not leave any forgiven or discharged debt off of your tax return. If you do, you will more than likely hear from the IRS in the future for failure to pay, which will cost you more money in the long run. Look at your credit report to ensure you don’t have any unpaid debt from the last three years.

What if I Receive a 1099-C for Old Debt?

Be careful when it comes to old debt and 1099-Cs. Creditors who follow IRS guidelines should send out 1099-Cs when a debt lies dormant for three years and there has been no significant collection activity for the past year.

Specifically, the IRS 1099 instructions state that debt is canceled “when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31.”

However, the creditor can rebut this cancelation if “the creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31.”

If a creditor sends out 1099-Cs years (or decades) after the 1099 deadlines, the responsibility falls upon the taxpayer to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation, and you may wind up arguing with the IRS to get it resolved.

What if I Receive a 1099-C for Debts Canceled in Bankruptcy?

You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.

Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send an unrequired 1099-C years after the fact, you likely won’t have to jump through hoops to prove the debt was discharged.

Getting a 1099-C can be confusing, especially if you don’t have a handle on your credit. Avoid future credit surprises by using Credit.com’s free credit report tool.

Not many know what a 1099-C is or why they receive it. But these forms can be a little scary because they’re tax documents—and no one wants to mess up their taxes. When you get one, it’s because you had a portion or all of a debt canceled.

It’s important to understand what a 1099-C is and what to do about it to ensure you are filing your taxes correctly. Here’s what you need to know.

What’s a 1099-C?

A 1099-C falls under the 1099 tax form series of information returns for the Internal Revenue Service (IRS). These forms let the IRS know you’ve received income outside of your W-2 income. Any company that pays an individual $600 or more in a year is required to send the recipient a 1099. You often receive a 1099-C when $600 or more of your debt is forgiven or discharged.

When you use credit or take out a loan, that borrowed money is still currency you can use—even if you don’t pay it back. So when debt is canceled, that money is considered ordinary income and is therefore taxable (if over $600), which means you have to report it on your tax return. Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged.

You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest.

You owned a home that went into foreclosure and there was a forgiven deficiency (a difference between the home’s value and what you owe on it).

You sold a home in a short sale where the lender agreed to accept less than the full amount you owe.

You didn’t pay anything on a debt for at least three years and there has been no collection activity in the past year.

Are My Debts Erased with a 1099-C?

If you know you received a 1099-C because of a settlement agreement, where you paid off debt for less than the full amount due, then you don’t owe anything. If the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may determine what debt you are and are not responsible for.

Anytime you receive a 1099-C, check the form for errors. If you find any, first work with your creditor to get the information corrected. If that doesn’t resolve the issue, then you can include an explanation with your tax return. To find out if a 1099-C has been filed, you can request a wage and income transcript from the IRS for the tax year or years in question. The transcript should list any 1099-Cs that were filed under your Social Security number.

Do I Have to Pay Taxes on the 1099-C Amount?

The IRS will automatically assume that the amount listed on the 1099-C is accurate and will expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, you could receive a larger tax bill or a smaller refund. However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income.

One of the most commonly used exclusions is the insolvency exclusion. It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.

If the amount by which you are insolvent is less than the amount on the 1099-C, then you may be able to avoid including part of that amount in your income. However, the insolvency exclusion may not be the perfect fit for everyone—there may be another exclusion that fits your situation better.

What if I Don’t Receive a 1099-C for Canceled Debt?

Even if you don’t receive a 1099-C, you are still responsible for reporting canceled debt as taxable income. Make sure you do not leave any forgiven or discharged debt off of your tax return. If you do, you will more than likely hear from the IRS in the future for failure to pay, which will cost you more money in the long run. Look at your credit report to ensure you don’t have any unpaid debt from the last three years.

What if I Receive a 1099-C for Old Debt?

Be careful when it comes to old debt and 1099-Cs. Creditors who follow IRS guidelines should send out 1099-Cs when a debt lies dormant for three years and there has been no significant collection activity for the past year.

Specifically, the IRS 1099 instructions state that debt is canceled “when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31.”

However, the creditor can rebut this cancelation if “the creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31.”

If a creditor sends out 1099-Cs years (or decades) after the 1099 deadlines, the responsibility falls upon the taxpayer to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation, and you may wind up arguing with the IRS to get it resolved.

What if I Receive a 1099-C for Debts Canceled in Bankruptcy?

You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.

Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send an unrequired 1099-C years after the fact, you likely won’t have to jump through hoops to prove the debt was discharged.

Getting a 1099-C can be confusing, especially if you don’t have a handle on your credit. Avoid future credit surprises by using Credit.com’s free credit report tool.

US consumers broke through quite a barrier earlier this year, when total credit card debt topped $1 trillion for the first time since the Great Recession. Then in June, total credit card debt reached $1.021 trillion, besting the previous record set back in April 2008, just as the Great Recession began.

There’s a natural impulse to see this as a bad sign: the last time credit card debt hit $1 trillion, things didn’t end so well. High revolving-debt levels can be an indication that consumers are struggling to make ends meet or that their incomes aren’t keeping up with expenses. It can also indicate that lenders are giving away credit too easily.

Or, it might mean that economic activity is increasing and consumers are optimistic about the future.

Underlying data suggest a bit of both. Read on to learn more about the good and bad, as well as where there may be reason for concern.

The Good: Responsible Consumers Are Building Credit

The credit card debt record isn’t a surprise to people who have been following the industry. In May, TransUnion revealed that access to credit cards had reached its highest level since 2005: a total of 171 million consumers had access to a card, the credit bureau said. Meanwhile, credit limits for the best credit card customers—those with particularly high (or super-prime) credit scores—have also risen quickly; the average total credit line for super-prime consumers rose from $29,176 in 2010 to $33,371 earlier this year. More cards and higher credit limits lead to more spending and more borrowing—and the new debt record.

“The card market went through a transformation after the recession as more lenders opened up access to subprime and near-prime consumers. The competition for super-prime consumers has become fierce, and we are seeing it manifest in higher total credit lines,” said Paul Siegfried, senior vice president and credit card business leader for TransUnion.

The American Bankers Association (ABA) released similar data in late July. It found that the number of new accounts had increased by 8.8% in Q1 compared with the same period the previous year.

“A stronger labor market continues to serve as a bright spot in the US economy, putting more Americans in a better position to establish and build credit,” according to Executive Director of ABA’s Card Policy Council Jess Sharp.

More consumers with access to more credit is generally a good thing. It’s hard to be a US consumer—to rent a car, to book a hotel, and so on—without access to credit cards.

But within these reports lurk some ominous signs.

The Bad: Subprime Card Holder Numbers Are Growing Fast

Subprime credit consumers are the fastest-growing segment of the credit card market, TransUnion found. There are now 2.3 million more subprime credit card holders than there were in early 2015. The growth rate for subprime card holders was 8.9%—much higher than the 2.6% rate of all other consumers. And the ABA found that the average size of initial credit lines being granted to new subprime borrowers was growing at a faster rate than all other categories.

In other words, the increase in card debt might be the result of this fast-growing subprime borrower market.

Credit card delinquency rates are also growing—from 1.50% in 2016’s first quarter to 1.69% in 2017’s first quarter. TransUnion attributes this to the increase in subprime card users but also notes that it wasn’t unexpected.

“The recent surge in subprime cards has contributed to an increase in the card delinquency rate at the start of the year, but from a pre-recession, historical perspective, we are still at low levels of delinquency,” Siegfried said.

That was little comfort to investors earlier this year, when both Discover and Capital One announced a surprise increase in defaults. Shares of both fell about 3% in one day on “here we go again” fears.

The Larger Context: Credit Debt Doesn’t Exist in a Vacuum

All this is happening with the backdrop of recent concerns about the suddenly slumping auto sales market. A huge increase in subprime car loans helped fuel record auto sales in the past several years, but rising delinquencies have contributed to an alarming slowdown in overall auto sales—and loose comparisons to the subprime mortgage bubble that fueled the Great Recession.

However, it’s far too early to suggest that subprime credit card lending is a sign of trouble, let alone big trouble. Credit card debt is easy to misinterpret because those numbers are meaningless without context. A consumer who charges $6,000 and pays that balance off each month is much better off than one who charges $1,500 and struggles to make minimum payments.

It’s important to remember that the majority of Americans don’t carry a credit card balance from month to month. The ABA says 28.8% of account holders pay their balance in full each month (the so-called “transactors” in the image below), and another 27.2% don’t use their cards at all. The remaining category is the one to watch: the “revolvers,” who carry a balance and often pay high rates. Currently, 44% of card holders carry a balance each month. Their ranks rose 0.3% in the most recently reported quarter, while the share of transactors fell by 0.3%.

So that’s a number to watch—much more important than average balances or total credit card debt. If more people can’t pay their whole credit card bill every month, there’s a real problem brewing. And while that group has increased slightly, it’s still below the recession peak.

Perhaps the most positive finding from the ABA report is that outstanding credit card debt as a share of consumer disposable income isn’t climbing. In fact, it fell by a small fraction, to 5.3%. That’s a good indicator that consumers aren’t struggling to pay their credit card bills or increasing their plastic spending at a rate faster than their incomes are growing.

Protect Yourself from Whatever the Market May Hold

So the new record credit card debt is truly a mixed signal. With subprime lending and defaults up, auto loans in a bit of trouble, and some investors worried, this milestone is a good time to pause and evaluate whether America is once again heading down the road of too-easy credit followed by recession. But by itself, $1.02 trillion is just a number, and it might not indicate anything.

Either way, it’s a good idea to stay on top of your credit report—which you can check for free at Credit.com—to ensure you’re in a good place, regardless of what the coming years might bring.

Credit scoring is a mystery to many people, and for good reason. It’s not easy to understand the grading process or which factors matter most.

While every lender has its own method for deciding which customers are worthy of financial trust, more than 90% of top U.S. businesses rely on the FICO score when reviewing credit and loan applications, according to the company. Of course, you have more than one FICO score, so you might be feeling confused all over again, but here’s the good news: When it comes to credit health, it’s best to narrow your focus to five main factors:

Credit length

Payment history

Account diversity

Inquiries

Credit utilization

Why Is Credit Utilization So Important?

Every factor of credit scoring is crucial, but credit utilization is responsible for 30% of your overall score, second only to your payment history’s weight of 35%. Credit utilization measures your revolving balances against your total credit limit. Lenders and credit card issuers rely on credit utilization to predict risk and future behavior. In general, the higher your utilization ratio, the greater your risk of defaulting on your balances. Risky behavior isn’t rewarded in the world of credit scoring, and you may see a decrease in your scores as your utilization ratio goes up.

To understand credit utilization, you first need to understand your line-item and aggregate calculations.

Line-Item Utilization

Line-item utilization measures your individual credit card balances against your individual limits. For example, suppose you have three credit cards, each with a $10,000 limit. Based on your current balances, your line-item utilizations break down like this:

Aggregate Utilization

The average of your credit card utilizations is called aggregate utilization. Calculate yours by combining your current balances and dividing them by your total credit limit. In the example above, your total balance is $9,800 and your total limit is $30,000; therefore, your aggregate credit utilization is $9,800 / $30,000 = 0.32 × 100 = 32.6%

Which One Matters?

Line-item and aggregate utilization are both important factors in overall credit health, and FICO recommends keeping yours as low as possible.

If you struggle to curb spending or rely on credit cards to make ends meet, overhauling your budget is the first step. A few monthly changes could help you avoid overwhelming debt and related credit damage.

Check Your Credit Reports for Accuracy

Your credit reports tell the larger story of your financial history and responsibility, and accuracy is key. For example, suppose Card A’s $10,000 credit limit is mistakenly listed as $6,500 on your credit reports. While it may seem like a small issue, an incorrect credit limit can alter your utilization ratio and damage your credit score in the process. In this case, your line-item utilization would increase from 45% to 69.2%, and your aggregate utilization would increase from 32.6% to 37%. You can’t afford to ignore the details. Order free copies of your credit reports to ensure that they accurately reflect your credit card balances and limits.

Request a Limit Increase

If you’re working on debt reduction but need a quick fix, consider asking your lenders for limit increases on each of your cards. For example, increasing Card B’s limit to $15,000 would lower your line-item utilization from 20% to 13.3%, and your aggregate ratio from 32.6% to 28%. Requesting a limit increase could place a hard inquiry on your credit file, costing your score a few points, but the benefits of lower credit utilization are usually worth the temporary ding.

Change Your Bills’ Due Dates

It’s difficult to benefit from credit utilization if you are constantly battling the clock. If your credit card issuers report customer balances to the credit bureaus before you pay your bill, it may seem like your utilization ratio is constantly high. The fix? Contact your issuers and ask them when they typically report to the credit bureaus, and then move your bill’s due date to the week before. This strategy allows you to take full advantage of low credit utilization by giving you time to pay your balances before the reporting date.